Glencore Woes Cast Shadow over Coal M&A

Glencore's efforts to reduce debts to turn around its share price will limit its ability to do deals on coal assets and its absence is expected to slow consolidation in the depressed sector.

As the largest shipper of thermal coal, Glencore (GLCNF) has been omnipresent in deals concerning assets in the sector, where a glut of supply has sent prices to multi-year lows, prompting expectations for a wave of consolidation among miners.

This changed in September, however, when Glencore succumbed to shareholder pressure and announced plans to reduce its debt to $20 billion from the current $30 billion, including a share issue and asset sales.

"Glencore, if they had been financially powerful, would have accelerated the consolidation of the thermal coal industry," a trader at a mining company said.

Glencore declined to comment on its ability to make acquisitions.

The mining and trading company's overhaul is expected to tie its hands on even the most attractive of deals, shrinking the pool of potential buyers of coal assets, which was already suffering from a withdrawal of investors conscious of the environmental impact of coal power.

"At the moment they're (Glencore) focused on sorting out their own house. It's good news for anyone else who is a buyer, it's one less significant natural buyer in the market," Neil Passmore, chief executive of corporate finance advisory firm Hannam & Partners, said on the sidelines of the Coaltrans world coal conference in Barcelona.

"If you're a seller it's bad news. Your shortlist of people who can move quickly, and are probably always there at some sort of price - one of those guys is now largely out of the market."

Traders said that prior to its plan to cut debts, Glencore was in competition with X2 Resources - the private equity fund set up by former Xstrata (XSRAF.PK) boss Mick Davis - for coal assets including Rio Tinto (RTNTF)'s Australian Hunter Valley Operations and Mount Thorley Warkworth mines.

"Without Glencore there, obviously the competitive tension is much reduced and I would assume that Mick Davis and his bankers are already in discussion with Rio," a trader said.

"Without the realistic prospect of Glencore bidding in competition then presumably X2 is able to be a bit more aggressive with their pricing."

Glencore's last deal before its debt-reduction plan kicked in was the acquisition of Vale's Australian Integra coal mine with Bloomfield Group in August.

The unprecedented shareholder pressure over the past six months at Glencore has cautioned its private rivals to think twice before going public or amassing large physical assets.

Privately held trade houses Vitol, Trafigura, Mercuria and Gunvor are not as asset-heavy as Glencore, focussing instead on their core trading activities.

This month Trafigura and Vitol raised over $10 billion via syndicated loans but the funds were not expected to be used on any large asset acquisitions.

"I'm sure that Trafigura and Vitol are not going to go out buying assets, I'm sure they're just raising funds to shore up their core businesses, the trading business," a mining-focussed private equity investor said.

"Their appetite for mining assets is reduced."

Reporting by Sarah McFarlane